ValorInveste: Cover story – A step beyond the numbers

Sales, Felício, Siqueira and Braga, of CSHG: the objective is to go beyond the cold-hard numbers in pursuit of concrete clues on the directions of the business

SÃO PAULO - Have you ever imagined stopping by a mill to investigate whether a company is or isn't paying a fair price for a new factory? Well, that's exactly what Maurício Felício did. Felício is part of an asset management team at Credit Suisse Hedging-Griffo (CSHG). Armed with experience gained over a few years working in the sugar and alcohol sector and many contacts that he made in the area, he agreed to take on an alias and literally went out into the field. It worked. The award for his performance was confirming what the company's figures had already indicated: Cosan, a global bioenergy concern, was conducting its business at reasonable prices that would probably generate value for the company. "Clearly, I will never buy a mill. But you can go as far as you can within limits, obviously, to find out what's happening in the sector," he explains.

Felício is part of a specific group of managers that base their choices on the obsessive pursuit of information that is not a consensus. To this end, they go out, collect opinions, investigate and test products and services on their own. The objective is to look beyond the cold-hard numbers and financial statements in search of concrete clues on the quality and direction of a given business - a broader horizon of three to five years. It's an exercise that certainly contributes to profoundly understanding the company and the dynamics of the respective sector as a whole. This work involves 24 hours attention seven days a week and, therefore, much dedication. And, of course, a person has to like it. The managers interviewed by ValorInveste simply adore these tasks.

"The company's numbers (M.Dias Branco, cookie and pasta maker) said that it was market leader in a certain state, but I had never heard of their brands," explains the associate-manager of Fama Investimentos, Rodrigo Sancovsky. What to do? After pondering a few ideas, the team made an apparently simple decision. Armed with a camera, one of the analysts was sent on tour throughout the Northeast with the following mission: photograph supermarket aisles. The specialist stood at one end of the aisle and asked for help from a local to fit the long line of the company's products in the picture. The images were quickly transmitted to São Paulo along with the following phrase: "From here to there are only M. Dias Branco products." The effort was fundamental for the decision to buy a slice of capital in the company, which is a highlight in Fama's portfolio today.

An expanding wave

There's growing number of brokerage houses seeking to devote maximum attention to the day-to-day life of companies as one of the most important tools before making decisions in the ethereal world of stock exchanges. In market religion, the "non-orthodox fundamentalists" look for important information to guide their investment decisions through observation and research into real life. An effort that the managers themselves call "field work" - the same term used in areas such as anthropology or geography to describe a practical activity that uses observation as its main tool.

For specialists, rather than taking an infallible tip from a work colleague when choosing stocks, it would be better for the investor to step outside his or her comfort zone and seek to understand more about the company. And not only evaluating the company's numbers, but looking at the information available in the day to day. It is clear that passing as an experienced mill owner or traveling to visit supermarkets in the Northeast are not tasks for just anyone. The initiatives make sense in the context in which they were used, but are complex and demand time, resources and a certain level of experience - requirements that are normally outside the reach of common investors. There are, however, simple alternative approaches.

"A man will never understand what a shoe means to a woman," recognizes João Braga, one of the managers of the CSHG team. But although he won't admit it, he came very close. Before Arezzo's shares debuted on stock markets at the beginning of 2011, the manager was given the mission of evaluating the company and understanding of it would be interesting to participate in the capital opening. Disoriented, he opted to gather the available numbers and conduct an "opinion poll." He put together and extensive questionnaire and distributed it to roughly 30 women in his circle of friends and work colleagues. The questions included everything from preferred brands to the number of shoes that they bought per year, in addition to obviously, what they thought of Arezzo. In the end, together with the CSHG group, he opted not to participate in the initial public offering because of the evaluation.

But that didn't stop Braga from taking advantage of the poll's results. He discovered, for example, that many women that responded to the poll buy over 60 pairs of shoes per year - something that defies comprehension. "I have had the same three pairs for several years," he compares. The manager also said that the experience made the importance of shoes in the female universeclear. "Arezzo is the Souza Cruz [cigarette manufacturer] of women," he affirms, between laughs.

Other unusual stories can be found in the world of asset managers. In 2010, Steven Iveson, partner at Explora Investimentos, needed to know more about the student financing policy adopted by a public company in the education field. He didn't hesitate: instead of turning to traditional information sources, the engineer, who graduated from São Paulo University's Polytechnic School in 2002, decided to take the school's entrance exam. Marcos Duarte, a partner at Polo, affirms that he always buys things on B2W (the e-commerce area of Loja Americanas and Submarino) to verify whether merchandise is being delivered on time.

At Bogari Capital, partner Érico Argolo, affirms that he only began to pay attention to the retail clothing store Le Lis Blanc after its initial public offering (IPO) in 2008. "The IPO had sparse liquidity and few monitored the shares," he recalls. "But we started to realize that many women wore the brand and adored their clothing, which made us see that it was a business model that could work out." The executive affirms that the shares were bought a little after the IPO and when they were sold in 2011, they generated an almost threefold profit.

In an even more investigative line, digging around in the personal lives of company controllers is even okay. At Leblon Equities - the Rio de Janeiro-based manager created in 2008 with part of another team famous for its investigative analysis a Investidor Profissional (IP) -, the motto is get to know the professionals that run the day to day of companies.

Objective: to better understand what can sustain financial results in the long-term. The method here is something similar to an interrogation. "You don't find answers after two or three meetings, but after 15," explains one of the partners in Leblon, Pedro Rudge.

Pedro Rudge, of Leblon Equities: the investor has to like going into the field, because it is work

Questioned whether this tactic could cause some discomfort, Rudge is emphatic. "At times it is even tiresome. In most cases, we ask the same thing to see if the discourse is the same, testing to see if the professional is practicing what he/she preaches." Exactly for this reason, he says, in many situations the alternative is to approach someone who is not worried about discussing the difficulties the sector is facing, like a private competitor. "It is an excellent strategy to evaluate whether the target company is not being softer than it should."

What these managers often do is test a service or a product, like acquiring a dozen retail cards to evaluate the companies' potential leverage. "I started accumulating a pile of cards from companies like Renner, Riachuelo and Hypercard, with the objective of discovering how much credit they would give and average citizen. I discovered that they don't just give away gigantic limits out there," comments CSHG's Braga.

Fama's team did similar work in another economic scenario. A retail store whose shares were not on the manager's platform said that it was making its credit granting more restrictive. The asset manager's concern was that if the store's credit card default rose a few percentage points, it would cancel out any additional value that the growth in sales base offered. Solution: check it out.

"We sent three different analysts to stores on different days and in each one of the cases it was the same story: all they had to do is to provide their name and i.d. and all left the store with a credit card. They didn't even need proof of residence," explains Sancovsky. "It was better not to invest."

In the quest for knowledge that the market does not have, even the supreme sacrifice - watching TV all night - is fair game. Not just any channel, but TV Câmara (Chamber of Deputies TV). Pedro Sales, telecommunications analysts at CSHG, recalls that through one of the consulting firms that render services to the company, he found out that an important measure affecting taxation in the call center sector would be voted on and if accepted, would have a very positive impact on shares in Contax - one the team's picks. "I spent the night following the vote and imagine my surprise when the next day the company's shares barely even moved! I guess TV Câmara doesn't have much of an audience," jokes Sales, who increased holding in the shares.

The more diversified the better

In the fundamentalist analysis of these managers, the spreadsheet divides protagonism with diligence, the observation of the company in the day to day. Everything works more or less like a test of hypotheses in which experiences and observations on the real economy mix with information right off the spreadsheet, without ever serving to justify buying or selling a share on its own.

The fathers of this school are very well known. Billionaire investor Warren Buffet and his guru Benjamin Graham comprise a club of superheroes for the common investor, alongside Peter Lynch, the legendary manager of Fidelity in the 1980s. All are remembered as aces in the work field, mythical figures not only because they made consistently correct decisions, but above all because the used simple methods available to anyone. In Brazil, this "hotter" analysis involving daily observation is also very recent. At least until the end of the 90s, market instability left minimal room for anything other than what is known as "directional" strategy - the attempt to understand in which direction the country was moving, and with it, a little diversified group of shares listed on stock exchanges.

Longer term strategies only began to make sense for this market with the economic stabilization program in the mid-90s and the resumption of public offerings later on in 2004.

Luis Stuhlberger, responsible for the famed Verde fund managed by CSHG has built his management history since the 90s on the careful observation of what happens around him. He himself has said that managers and analysts many times spend a considerable part of their time talking with their own peers and forget to look outside. Stuhlberger is known for endeavoring to read tons of reports and conversing with his clients. And every time he comes back from vacation or weekends, he has an interesting story to tell.

According to managers, although long, the road points to a larger number of companies that should seek out stock markets as a source of financing, reinforcing the importance of broader analysis. "As investors begin to seek out alternatives to CDIs (interbank CDs) to obtain reasonable returns, I see more companies on stock exchanges," says Sancovsky of Fama.

But specialists warn that some of the basic precepts also need to be clear. Anyone investing in stock markets cannot do without the technical evaluation work on a company's fundamentals versus potential returns, underscores Reginaldo Alexandre, president of the São Paulo chapter of the Capital Markets Analysts and Professionals Association (Apimec). For example, one must investigate the company's quality of managers, the structure of capital and the level of financial leverage. After this, one deals with the trading value of shares on stock markets and evaluates whether gains are attractive enough. "The company could be excellent, but its shares may be too expensive," affirms the specialist. "Having a great business does nothing if that is already reflected in the price."

Insper professor of finance Ricardo Humberto Rocha considers it valid for investors to stay alert and keep a critical eye on the quality of the product and services rendered by the company, but stresses that it is something that is purely complementary to the decision to invest. Determining whether or not to invest, in essence, should come from the history and the financial potential of company coupled with market pricing. "Not to mention that field work is not an easy task," says Rocha. "One must train to distinguish what may be mere empathy with the business from a real competitive advantage," he adds.

Specialists and managers also point to the fact that capital markets are much more efficient than they were in the past, when you could wait for a company to be very successful in some aspect in order to buy its shares soon after. Hence the time dedicated to observation inside and outside the spreadsheet appears as a fundamental issue to seal one's convictions.

The competition with teams that do this professionally and with many more resources is obviously unequal. Iram Siquiera, part of managing quartet at CSHG, recalls that every year it travels at least once to Asia when there are major commodities consumers. "When I go to China, I always participate in a Congress with 500 or 600 people from the steel and mining sector, where I can gauge the market temperature," he affirms. "This is an advantage. We have a budget to do things that perhaps a smaller manager could not."

Inexperience is another major handicap. In Rocha's assessment, it is a disadvantage that could affect even professionals in the field. "Today, (investment) analysts, for example, are very young. In general, they have good technical training, but some may be influenced by certain beliefs," he affirms. "In order to prospect for good companies or identify bad business, one must have a broader and more mature perspective." Alexandre of Apimec counters that argument. "Just as the young (analysts) may lack experience, the old may not have the same capacity for abstraction," he argues.

In any situation, however, the specialist recommends that the investment analysis be as broad as possible. "One single aspect could give a false picture of the company's business or the 'sample' chosen may not reflect the whole."

Weighing everything, the investor willing to shoulder the task and the risk of selecting a group of shares for investment has, however, much to do. At his or her disposal, the managers note, is an excellent and free research tool - the internet.

"Before buying a share because he or she [the investor] saw it in a forum, Google it. That is the least the investor can do," says Braga, of CSHG.

Another suggestion is accessing the Reference Forms (filed at the Brazilian Securities and Exchange Commission- CVM), which are much more complete than the old annual information filing. The public document available on CVM's site or on a public company's page offers much more quality information, such as the structure of executive compensation or operations with subsidiaries. "The problem is that an individual has other things to do and normally will not dedicate enough time for deeper analysis. And he or she has to like doing it as well, because it is work," comments Rudge, of Leblon.

In the attempt to obtain valuable information observing "life as it is," some things, however, are not condoned by specialists. Going beyond ethical limits, trying to obtain privileged information or abandoning common sense are out of the question. Sancovsky of Fama recalls that once he was analyzing a family company that in the past has faced some fighting among partners. Since the idea was to obtain different perspectives on what was going on, the controller was advised that the manager would be pursuing conversations with members of the family.

Personal limits must also be respected. With precisely the hottest sectors under his management when it comes to real life - consumption, retail, banks, financial services, health and education-, Braga at CSHG was not at all intimidated by acquiring a myriad of retail credit cards, going to sales points and interrogating store owners about the functionality of their card machines. He even tried to understand women's fascination for shoes. In his investigative anxiety, he even considered becoming a Natura sales consultant. But, then he thought, that'd be bit too much. (Márcio Anaya contributed to this article)